Will Trump Budget Lead to a Government Shutdown?

Earlier this week, President Trump issued a proposed government budget for FY2018 calling for the largest reduction in domestic program spending since the aftermath of World War II. The White House budget would increase spending on defense by 10%, offsetting that amount by a similar reduction in spending on domestic programs. Because current defense and domestic spending are roughly equal, the budget in effect calls for domestic agencies in the aggregate to reduce spending by the same 10%. (There would be no cuts in entitlement programs such as Social Security and Medicare.)

Certain agencies – Homeland Security and Veterans Affairs - are exempt from cuts. The proposed cuts would fall unevenly on the remaining agencies, with EPA (31%), State (20%), Agriculture (21%), and Labor (21%) bearing the brunt of the cutbacks.

The White House budget proposal is only the beginning of the budgeting process. Congress will write its own budget, often with little regard for what the administration says. After adopting a budget (which is not required to go to the president for signature), Congress uses its budget as a blueprint to pass a series of appropriations bills, setting the amounts each agency can spend. Under the Senate filibuster rules, passage of these appropriations bills requires sixty votes for passage. To secure the support of Democrats and recalcitrant moderate Republicans, Congress almost certainly will scale back Trump’s proposed domestic cuts -- and, presumably, his additional defense spending -- significantly.

But Congress faces a more imminent deadline. The budgetary procedure outlined above addresses government spending for the 2018 fiscal year, which begins October 1, 2017. Congress, however, has funded the federal government only through April 28, 2017. Thus, before even considering the Trump budget, Congress must appropriate money to keep the government running from May through September.

To do so, Congress is likely to consider a “continuing resolution” (CR), which simply continues government funding during the interim period at current spending levels. As an appropriation measure, a CR also requires sixty Senate votes. Consideration of the CR will be the first opportunity for frustrated Democrats to push back against the Trump agenda. They could be joined in that effort by moderate Republicans Senators, who are concerned that severe cutbacks in social programs would harm many of their constituents.

If Congress does not pass a CR by April 28, then on April 29 the federal government will shut down. Given the heightened rancor in Washington, we believe that the possibility of a shutdown cannot be dismissed.

A shutdown has the potential to roil the markets, at least in the short term. Businesses are looking forward to tax reform legislation that would cut business tax rates. The failure of Congress to pass straightforward legislation to keep the government operating could suggest that passing comprehensive legislation such as tax reform will be more difficult than expected. We continue to believe, however, that Congress is likely to pass tax relief legislation this year, so that, if it occurs, an April market drop could be a buying opportunity.

Andrew H. Friedman is the principal of The Washington Update, LLC and a former senior partner in a Washington, D.C. law firm. He and his colleague Jeff Bush speak regularly on legislative and regulatory developments and trends affecting investment, insurance, and retirement products. They may be reached at www.TheWashingtonUpdate.com.

The authors of this paper are not providing legal or tax advice as to the matters discussed herein. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities). Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.